Hello and welcome. This is Abhinav Gulechha, and, in this video, I’ll be discussing about a situation where you are a US citizen or a green card holder, and you are planning to relocate to India in a few years. So what are the kind some actionables or some points that you can keep in mind? I will discuss 1 by 1. So, first thing you need to keep in mind is that if you’re a US citizen, you are a green card holder, then you are wedded to the US legal system to the US tax system, and you need to continue filing your US tax returns and offering your world income to tax in US in form 10 40.
Right? So, form 10 40 is what is applicable to you, not the 10 40 n r. So you need to keep 10 40 or 10 40 s r depending upon your age. So you need to keep in mind that you’ll have to keep offering your world income in the US tax, returns even after you moving out of the US. Right?
So now you can explore claiming a foreign earned income exclusion and a foreign housing, deduction in your US return for your India earned income. Right? So in US, you get a foreign earned income exclusion, FEIE. That exclusion, you get up to, I think, 1 lakh $20,000 in US. But that is only on the earned income in India or anywhere outside of the US, not on the investment income.
For investment income, you will have to offer the tax offer the income to tax in US, but for the earned income, there’s a significant kind of exclusion that you get. So in India, suppose you are working in a job or you have your business in India. Now there are certain conditions. You’ll have to check the fine print, for the conditions. And basis the conditions, basis the eligibility, you can claim that.
So, practically, till that amount, it will be tax free for US tax purposes. And, also, foreign housing deduction, you can see your eligibility and accordingly claim, right, in the US return. Now if you have investments in India or any US country, for example, if you have returned back to India and you have investments in India, plus you have, like, some investments in UAE or any other country, you’ll have to disclose them in the foreign information returns. There is a host of foreign information returns, which is starting with foreign bank account reporting, f bar, then form 8938, which is the FATCA report, then form 5471, 8865. These are reporting of a US owner in any foreign partnerships or foreign corporations, like, India, if you’re a director in an Indian company or a partner in Indian partnership, you have to disclose your ownership in or any trusts.
If you are owner of an Indian trust, all that you have to disclose in US. Right? Because US views see, basic thing is US views any non US investments by US citizens, suspiciously. Right? Because they think the regulations have been so construed that they think that the, investments have been made to evade US tax.
So they don’t stop you from making the investments, but they want increased kind of reporting requirements for every rupee or that you have invested outside of the US. And then you have one very draconian or a punitive requirement is from 8621, which basically is on prefix. Any pooled non US investments, which may be like Indian Mutual Funds or ETFs, they all constitute are construed as 86 PFIC investment, and you need to report, 8621 along with your US tax return for all the investment for all such investments. Now the bad thing is that if you miss these foreign information returns, your form 10 40 that you file will be treated as incomplete. And so, generally, there is a a statute of limitation of 3 years or 6 years that apply.
But if you have not if your return is not considered complete, then there is a statute of limitation doesn’t apply. That means IRS can question the returns even after, 20 years. Right? So that is the problem. Okay.
If you have missed disclosing your non US income or non US returns, if you have not filed, or you have not declared your non US assets, Indian investments, then or you have if you have not filed your 8621 for your Indian mutual funds, then there is a facility where US gives you, the IRS gives you is the streamlined procedures. The penalty for non filing of the foreign information returns is very high. Right? So and if it’s considered willful, then it can go even up to 1 lakh USD. Right?
But and even includes the criminal, prosecution. So US offers you this wonderful way where if there is the will if the, violation is non willful, you can opt for the iris streamline procedures, which is again divided whether it’s a domestic procedure for US residents and foreign STFP for, US citizens based abroad, where you can come ahead and you can disclose your non US incomes. If it’s a domestic procedures, which is basically US resident, you need to pay a 5% title 26 penalty. But if it’s a foreign yuan foreign resident, US it is US citizen or green card holder, but living outside of the US, then even that is waived off. However, please discuss with your tax attorney completely, because it’s a very sensitive thing, about non disclosure.
If it is if it’s a willful non disclosure and you are offering the income under a streamlined procedure, then even heavier penalties can be imposed on you. So you need to be very careful, with respect to the, disclosures. Right? Okay. Obtain OCI.
If you have not obtained if you’re a US citizen, not for GC, but if you’re a US citizen, please obtain an OCI. It will put you at par with an Indian resident or an Indian nonresident in, in terms of all your investments in India. So it make it will make things easier for you in India. Right? Because you are returning back to India, then you’ll need to do the transactions and but if you have an OCI, then it will become make things easy.
Reduce benefits. If you are a US citizen, so you might be thinking that you’ll get benefits another DTA. Anyways, India US DTA is not a very strong DTA. It’s quite weak, actually. But even there, there is a savings clause in the India’s DTA, which basically says that if you’re a US citizen or a lawful permanent resident, basically, a green card holder of US, you don’t get the benefits under the DPA.
It will be the taxation system will remain the same as US will want to tax you, as per its own laws. It will not give you those benefits. So, please understand that whatever remaining little benefits that you get under the DTA that also may you may not get it, because of the being a US citizen or the GC. Good thing is that, otherwise, if you return if you are a non US citizen or a GC, when you return back to India, there is this thing about the very low estate tax threshold of 60,000 USD, which may if you have US situs assets, you may need to liquidate them to bring them to make them below that threshold. Otherwise, the estate tax starts applying.
However, in case you are a US citizen or green card holder, then there is a higher gift and estate tax limit. Actually, here, it’s not about the USC or GC as per the internal revenue code. There’s a different definition with respect to, domiciliary. If you are a domiciliary of US, again, the limits are slightly different. But if you’re a US domiciliary, the gift and estate tax limits are, like, very high, 13 point I think 13,000,000 and above.
And but the only thing is that your old assets will be considered. For a non US domiciliary having US assets, only the US assets are considered for calculation of 60,000 USD purposes for the estate tax trigger. But if you are a US domiciliary, your world assets will be considered for calculation of 30,000,000, USD, limit as the tax threshold. So that you need to keep in mind. Okay.
When you come back, so when you’ll be, like, coming back to India, you need to convert the Indian bank accounts to resident. This is of Indian family law requirement. If you don’t have anything in India, you will need to open Indian bank accounts. So if, like, you have 2 years to go from your return and if you still are a US resident, you and if you’ve come for a visit to India, we what I would suggest that you can open an Indian bank account, which is a NRO account, and you can then after your the NRO account, and you can fund that account from US, that is non-repatriable money, which you can use for, like, making payments in India when you come back or within, like, 1 or 2 years, you start making payments for your school for your children’s school education, rent, deposit, and everything. You can open a NRO account at least, fund that NRO account, and, if you don’t have an Indian bank account if you have an Indian bank account, which is an NRO account, hopefully, then you need to convert it into a resident account on your return.
Link your PAN with a card if you it’s not linked because that is a important requirement. If you want to do any financial transactions in shares, then I will suggest you to hold on. If you don’t have a DMAT accounts, I will suggest you to hold on. Don’t open fresh accounts. Open fresh account only after you return to India.
Because if you open a non PIS DMAT account, then you’ll need to close it, open up resident Demat account. It’s a very complicated procedure. So wait for your return of India. Till then, continue your US bank accounts. Now find a good CA with who knows about international tax.
So if you come back to India and you have US Bank account and you’ll have to file your returns in India, where you’ll need to disclose your foreign assets and schedule FA, and then depending if you are not if you’re a resident, ordinary resident as per Indian tax purposes, then you will not need to also disclose the income from certain, US investments. So find a CA who is good with international tax, preferably in your city, wherever. So if you’re a Bangalore, you’ll be coming back to Bangalore. If you’re coming back to Hyderabad, find a CA in Hyderabad. Find a CA in Bangalore who is good with international tax.
Also, find a good CPA with the international tax exposure because you’ll be having, US you’ll be filing US returns with, Indian investments. Right? So you might be required also to file, foreign information returns like f bar form 8938 and all. So you need to have also a CPA who has the international tax kind of an exposure with respect to the, foreign forms. Please check the US state obligations also post your return.
So unless you have a property in US, back in US or any connections back in US, you generally are considered a US from a state perspective, a nonresident, but please check the US state obligations. What are the US state obligations after you return? So if you have, like, a property back in the US, and you’ll maybe construed as a US state resident even after you return to India, then you might want to have a CPA who is actually physically based out of that particular state. Right? Okay.
Now when you are coming back to India, you can park your money in the FCNR accounts while you are a non resident. You can open a FCNR, Feet. Or after coming back to India, you can park your money into our FC account after becoming a a resident. That money is, like, free from the restrictions under the Indian family law with respect to if you want to maybe, invest back in US or send back to US, they all they all will be freely available. Have a will or nomination with respect to your US investments or US and a a contact in the US, an estate attorney contact, with respect to your US investments, your Indian will not be sufficient for your US investments.
You need to have a separate will, in my view, for your US investments and have a estate attorney, also a contact available. If you have investments in the US and long term goals in the INR, be okay with it. Be okay with the currency risk aspect of it. Indian currency generally depreciates, so that is good with respect to your investment portfolio, but it may reverse also. So be okay with that currency risk, because why?
The problem is that if you are a US citizen or a green card holder, because of the regulations and the way internal revenue code has been structured, with respect to non US investments, it’s always better to keep your investments in US. And then if the long term goals are there in INR, be okay with the currency risk unless you decide that you want to renounce your citizenship, because it will have its own set of tax implications, the exit tax, and other things. So be okay with investing in US, and brace yourself for the compliance cost that come with, or you can decide that I will invest in US, and then you brace for the compliance cost that come in with respect to your investments in India. Right? Then remember that whatever Indian tax you pay, you can claim only a proportionate credit of the same in the US federal return.
If you have because India is also a strong market, equity market, so if you want an exposure with respect to the Indian stock markets, you can get it through the US mutual funds or ETF route rather than investing in India, which can attract PFIC implications. Invest in US, get that expertise, get that exposure in the US itself. It will not attract the PFIC and the foreign reporting obligations. Update the Indian address in the US, whatever investments after you return, because that’ll help in, operating those accounts from outside in of India. Keep a spouse or close relative aware of the procedures for the US in investments in case of death or incapacity.
Update the US status in the Indian investments. For example, the FATCA forms that you need to fill, that you are a US person. If you don’t fill, then there is a penalty in India for the noncompliance. Keep some earned funds abroad. It’s always a good strategy.
Don’t move everything back in India. Keep some funds abroad or move it to an RSC account. Don’t remit 100% to a resident account. Right? These funds, because they are excluded from a FEMA regulations, tomorrow if you want to make a do a start up or something, you can just use those funds, and it will be excluded from the FEMA ODI regulations.
Or after your return back to India and becoming a ROI, you need to do disclosures of, the US assets in the Indian, returns and also the US incomes, and there are severe penalties in India for noncompliance. Make a 89 a election for 401k or traditional IRA. You can make a 89 a election after becoming an ROR that will defer your tax liability on the 401 k income till your withdrawal. I’ve, spoken on it in my other videos on 401 k. You can have a look at those videos.
401 k, traditionally, IRA withdrawals will be taxed in US at graduated rates only. Right? So, otherwise, if you are a US nonresident, then there is it’s, like, taxed at 2 parts. 1 is the contributions, which are taxed at graduate rate. Incomes are taxed at 30% or 25% reduced rate as per the DTA.
But in this case, since you are a US citizen or GC, it will be entire amount will be taxable in US at graduated rates only. Beware of investing in India in any products which qualify as prefix, which is all your mutual fund, ETF, REITs, InvIT, ULIFS, and all. Please be aware of the IRS reporting requirements that may arise with respect to your Indian investments like NPS, EPF, which may be treated as trusts in US. Check your final point. Check your are not eligibility.
If you are in r naught, that is a golden period to kind of, settle your US investments. Or if you want to hold on to your US investments, which is a good idea, then you can reset the cost basis towards the end of r naught. Right? So these are a few points that I thought, can help a US citizen or a GC planning to relocate to India in a few years. If you have any thoughts, comments, do please share in the comment section.
Thank you so much for watching this video.